Economics

The euro-zone crisis

The long shadow of Greece

THE euro crisis began in Athens some two years ago as the full extent of its dire public finances first became apparent. Now it has turned full circle again. Along with the acute difficulties in constructing a much stronger firefighting fund to protect countries like Italy, especially while Silvio Berlusconi still remains in charge, the agony of Greece is the main reason why today's summit in Brussels looks set to disappoint those expecting that it would deliver a fully worked-out solution.

At their last make-or-break meeting—the “emergency summit” of July 21st—these two interlinked problems were also crucial since Greece's woes had deteriorated and Italy had first come under attack by bond vigilantes. The leaders of the 17 euro-area countries announced measures to deal with both of them. Greece got a second bail-out, amounting to €109 billion ($152 billion) on top of the first one, announced in May 2010 in conjunction with the IMF, which was worth €107 billion (originally it was €110 billion but Slovakia refused to participate and Ireland and Portugal ceased to contribute when they, too, were bailed out).

This second rescue was tied to banks and other private institutions agreeing to take a modest hit on their lending to Greece in what was euphemistically called “private-sector involvement” (PSI). The summit also agreed upon measures to beef up the euro area's rescue fund, the EFSF (European Financial Stability Facility), and to give it a freer hand to protect other vulnerable economies, in particular Italy but also Spain.

It took almost three months for the 17 euro-zone parliaments to ratify these changes to the EFSF, which boosted its effective firepower from some €250 billion to €440 billion. But meanwhile the plight of Greece worsened to such an extent that European leaders must be wondering why they bothered. Following the July summit, the remaining capacity of the EFSF—given its existing commitments (to Ireland and Portugal as well as now to Greece) and taking into account additional help expected from the IMF—was reckoned to be around €280 billion. But the report of Greece's bail-out monitors leaked on October 21st blew that estimate out of the water.

The “troika” of the IMF, European Commission and European Central Bank had taken another long hard look at its imploding economy and exploding public debt. They concluded that on more realistic and gloomier assumptions, Greece would need additional official financing not of €109 billion, but of €252 billion. In the years until 2014, Greece will need €164 billion rather than the €109 billion envisaged in July; and instead of being able to fend for itself in the second half of this decade, it will need €89 billion of bail-out money. That would leave only around €100 billion available to the EFSF, assuming likely calls on the fund from recapitalising European banks and that the IMF calls a day on providing extra support on the grounds that Greece is a lost cause and cannot credibly regain solvency.

Greece's financing needs in turn threaten to devour the fund supposed to protect Italy. The plan being devised to bolster the EFSF—to make it more “efficient” as Wolfgang Schäuble, the German finance minister puts it—rests heavily on leverage. One way to do this, for example, would be for the rescue facility to offer first-loss insurance of 20% on new bonds issued by Italy, say, which in effect would magnify its resources fivefold, allowing €250 billion of resources to buttress €1.25 trillion of borrowing by Italy and Spain. But if the starting point is a fund of only €100 billion, then even with the leverage its effective firepower would be only €500 billion—far less than the trillion-sum figure the markets need to be cowed into submission.

With little realistic hope of boosting the EFSF further from its current €440 billion (hence the resort to leverage), it is vital to avoid the additional drain on its resources from Greece. That in turn explains why hopes of a voluntary PSI have evaporated. In fact, smoke and mirrors were needed to produce the supposed 21% reduction in the net present value of privately held Greek debt; the actual cut was closer to 5%. But now it is clear that the only way to avoid draining the EFSF of most of its remaining capacity is to get the private sector to take a much bigger hit, of up to 60% of the debt's face value. There will be nothing voluntary about that.

Sorting out all the legal and financial details of such a default will be a huge task, as will be the steps needed to protect the rest of the euro area from its shockwaves. No wonder European leaders are likely to confine themselves to a broad-brush statement of principles, while consigning the all-important wrangling over the precise numbers to future emergency meetings.

EURO-zone countries have to give Greece at least € 440 billion until 2020.

¤ Which country lied the most to enter into the EURO-zone, if not Greece.
¤ Which Euro-zone country artificially reduced their reported budget deficits the most, if not Greece.
¤ Which EURO-zone country has promised most and done least to solve their budget-crise, if not Greece.

Counting all debts in 2020 than each and every Greek can lean back and enjoy having received more than € 70.000:-- from us working in the EURO-zone.

Is this really what we in the EURO-zone want ?

You Greeks, continue not to pay your taxes, continue to be corrupt, continue to have nepotism, continue to scream and strike and destroy your own country, take your coffee break in the sun, look over the Mediterranean and laugh, laugh, laugh at us idiots who are working for your good life.

The question with regard to Greece remains, as it has been all along: How long will the EU keep trying to hold back the tide?

Greece will eventually default. There is simply no other way forward for them. If Greece defaults sooner, the damage to the rest of the euro zone countries will be smaller (although still substantial). If the EU holds on for months more, the eventual damage will only be larger.

Perhaps one of the Danes will recount the story of King Canute the next time the EU leaders meet.

I'm beginning to believe resistance to the Greek bailout and the crisis in general is being misreported. We've heard at great length about the reluctance to fund spendthrift Greeks, but I think much of that is actually aimed at the financial institutions and bondholders who lent the money and now own the debt. Again, we've focused on how the Germans don't want to subsidize Greek lifestyles but I think the German public also knows the money is going to financial institutions. I think resistance is stiffening because that public in particular - and others as well - now see themselves supporting these financial institutions forever. They now know, for example, that over half the money spent has gone to bondholders. They are surely wondering why these companies aren't writing off the loans. My reading of this has changed from thrifty North versus lazy South to North versus feeding the financial institutions. That makes more sense to me because the North, particularly Germany, knows they pumped vast amounts into countries like Spain. I think they more and more resent paying the lenders because the lenders should be held responsible for their idiocy.

jomiku, it is both. The Greeks themselves are getting sick and tired of austerity measures (the rioting speaks volumes), and so it is very hard for the Greek government to actually reign in public spending (this is why their bailout number keeps going up instead of down). They also have a lousy and corrupt tax collection system, so it is very hard for them to raise revenue.

On the flip side, the creditors that are holding Greek debt are balking at the size of the haircut they are being asked to take. I think if the range had stayed in the 5% to 20% range, they might grumble but acquiesce. However, a 60% writedown is huge for any lender or creditor -- depending on how much Greek debt is part of their portfolio, such a writedown could catastrophically damage their ability to pay off their own obligations, which would cause a cascade effect throughout Europe (this is the reason a 100% Greek default scares the bejezus out of the Eurozone).

Ultimately, it will require a combination of both sides suffering pain to bring this crisis to a close... and even then, this is just the beginning. There is still Portugal, Italy, Ireland, and Spain.

Greeks are angry because: 1. they like their lifestyle and they think that they work hard enough and gain little, so they demand its maintenance, 2. they don't feel like there is an actual plan. They have been hearing about austerity measures for the last 20 years. 3. They don't trust the system. Neither their government nor the EU. They think that nobody takes into consideration their needs. Don't forget that nobody really asked them if they want to become members of the European Union or part of the eurozone. 4. They don't "get" capitalism in the same way that Europeans do (which wouldn't be much of a problem if they weren't part of the Euro zone). Finally, allow me to ask: if Greek politicians are so canny as to fool the Harvard and Oxford educated economists of Europe regarding the country's finance, shouldn't we rethink the whole system and the people running the EU?

In the EURO- crises the “shit countries” Greece and Portugal will get a “golden handshake” and leave through the back door.

Looking back for some historical matters the last 100 years:
Tsar Russia fought Germany and Hungary – Austria.
Hungary – Austria fought Serbia.
Germany fought France and Russia, and Great Britain.
At the end USA fought Germany.

What happened.
Tsar Russia lost in the war, but to communism.
Russia made peace in 1917 with Germany.
Hungary-Austria lost and disappeared into several small states.
Germany lost (but which countries were the losers in 1933-1938).

Czechoslovakia was given to Nazi Germany by Great Britain and France.
France made agreements with Nazi Germany behind Great Britain.
Great Britain made agreements with Nazi Germany behind France.
Soviet and Germany made agreements dividing Europe.
Great Britain fought for “the empire” to remain intact.

Which country won and which country lost after WW 2.
It seems that the “winners” are the “losers” and the “losers” became “winners”.

Communism lost (this time) and capitalism won.
Soviet fell apart and Russia is today “super-capitalistic”.
Vietnam is more American than in the 60-ies.
P.R. of China is pure capitalistic.
N Korea will change to China-capitalism as soon as the old man dies.

Capitalism is now under hard “rules & regulations”.
USA uses communistic ways of controlling their “small rich citizens” if they have done something wrong (paid too little tax, illegal immigrant etc etc). See how USA “bends the arms” of the Swiss banks.
Great Britain owns the banks like in a communistic state.
The high politicians decide for the whole EU-population what to do, if we like it or not.

What does this have to do with Greece (and Portugal).
The history has taught the politicians that “we must help” those in trouble. Look how this was done in the past.

Berlin strike-uprising, the allied forces were too weak, too few soldiers & tanks and who would fight for a German worker anyhow.
Hungary uprising was a surprise. NATO was hesitant and rightly scared to do anything.
The Czechoslovakia spring came from people and their children remembering times before WW 2. NATO had more or less guaranteed “help” to Czechoslovakia if a communistic invasion happened. NATO wanted to be “much better” than during the “Hungary 1956 no help time”. And how ashamed was NATO after that no help was given.

The EURO-crises of today
Few top politicians have worked in “real life business”.
When they are elected THEY have done a GOOD JOB.
When they are not elected, THE POEPLE did not vote for them, so it’s THE PEOPLE TO BLAME.

In business it’s like this.
A bad department manager is losing money. Often you give him a 2:nd chance. When he asks that your company makes “some small investments” in his department, and after that “he guarantees” all will be a success. (GE and Siemens with their “alternative energy departments”). When he fails again he gets a “golden hand-shake” for leaving through the back door.

In business we know that things get bad with a customer if we have problems getting money for deliveries. So we start to deliver our products to this customer “cash on delivery”.

EURO-zone can do the same with Greece, cash to Greece when Greece has sold their electricity company, when Greece has sold “all the other units” they promised to sell like ports etc etc”. When Greece start collecting taxes like other countries.

Now Greece gets the money anyway because “Greece promises AGAIN to do the necessary privatizing. But treat Greece similar to “an insolvent customer without money”. First Greece makes changes then they get the money. No change then no money.

What will happen.
The main politicians Merkel and Sarkozy gave Greece money last year to “get rid of the problem”. In public they explained how well THEY solved the EURO-problem.

Later they discovered that Greece needs more money and the easy way is to say “Greece, you also get this money but nothing more”. And then they explain to us (citizens in EU) with a “confident wording” that this was the last payment needed for solving the EURO-crises.

And now we are in October 2011.
Which country will be the winner.

Look at the beginning of this writing.
Greece has not fought anyone.
Greece being an economical small “EURO shit country” they will be asked to leave through the back door, but with a golden hand-shake. It will cost, but after five years nobody remembers. The banks will get the required extra money from the governments (like communism).

"Greece's Long Shadow" stretches not only spatially but Temporally. For those of us on both sides of the Atlantic, The Wall Street Journal through its "The Source" Blog, is supporting a live blog of The European Summit. Be advised that America's "Daylight Saving" puts Eastern Time(EDT) only four hours behind Greenwich Mean Time(GMT). And that America will continue "Daylight Saving" for a full week after Europe gives up "Summer Time." So all next week (Sun30Oct - Sat5Nov11), UK Time (UKT) will be only 4 hours ahead of Eastern Daylight Time (EDT) and Central European Time (CET) will be only 5 hours ahead instead of 6. Here's the link to the Live Blog on The Wall Street Journal's "The Source."

For anyone who has been to Greece and has seen it from a civilians point of view knows that this situation won't be fixed for a long time. This is not the case of getting the money eventually and paying it back, Greece needs a whole culture change. Their shops are closed for half of the days, and the government is to proud to let big chain stores come in to help the country. Most people probably didn't know that they won't let a building bigger then the Acropolis be built. They've turned down casinos and malls that would help the country boom. A culture change is not in sight, parents rarely worked, so why should their children.

Greece is draining money from Germany and the EU that could be helping out several other countries in the meantime with all this money. Even with all this money they are still in chaos and should be until 2020 (expected). In the meantime, you could have helped Italy and Spain, other vital members of the EU. This could harm other potential bordering countries if Greece doesn't pull it together soon.